Monday, September 24, 2012

Most people who follow economic events have some familiarity
with John Maynard Keynes and Frederick Hayek.
Both economists were contemporaries at the London School of
Economics in the 1930’s and have huge followings in economics and public policy
to this day. People associate the public
policies of expanding government during recessions financed through public debt
and a weak dollar with Keynes. They also
associate austere government programs and a strong dollar policy with
Hayek. While Barack Obama would be
characterized as a follower of Keynes, Ron Paul would be characterized as a
follower of Hayek or what is currently referred to as the Austrian school,
which was Hayek’s home country where he grew up and first taught economics. While these two people represent the
extremes of contemporary economic thought, there is a third economist that
should be mentioned when attempting to understand the major economic event of
the last five years.

That person is Irving Fisher who was an economist in the
United States in the 1930’s during the Great Depression. He had a number of followers who elaborated
on his work. Among them was Charles
Kindleberger. These two economists
described the mechanisms associated with great financial economic depressions
that apply to today’s economics.

A financial collapse, such as the ones that were experienced
in 1929 and 2007, usually begin with an asset that can grow over time faster
than the average asset. Speculators
begin to recognize the growth potential and borrow money to buy more of the
asset, which in turn, causes the value of the asset to grow at a more
accelerated rate. Financiers begin to
see the potential of financing the asset as a growth market and put more funds
into the area. Soon, credit requirements
are lowered. More speculators are
enticed by the financing possibilities and more credit is put into the
market. This cycle continues until there
are no more speculators that can be enticed into the market to bid up the value
of the asset in question. In other words, there is no more credit that can be drawn into the
market to finance the asset. Either way,
the value of the asset will fall leaving vast sums of unsecured credit
exposure. There is a financial collapse
and neither Keynes nor Hayek adequately addresses it.

Fundamentally, what do we have here? Assume that the national economy can be
represented by a set of financial statements that a company, whether big or
small, would maintain. There is a
balance sheet, which is a snapshot statement of assets, liabilities and
equities, and an income statement, which is a summary of revenues and experiences. Note that the Fisher process focuses on
assets and liabilities, or balance sheet items.
It does not focus on employment, jobs, and growth, which are income
statement items.

The policy responses of a Keynesian would be to expand
government to take up the slack in the GPD.
In short, borrow funds to keep people working, which is an income
statement strategy. It assumes that the
income statement would correct the balance sheet, which is rarely the
case. The policy responses of an
Austrian would be to assume that the capital markets heal themselves. In short, the impairment to the capital
markets will result in creative destruction.
The economy will heal itself faster though a great many more people
being hurt in the process when compared to a Keynesian approach that will not
grow the economy much while not hurting as many people. Both sides of this continuum sound silly, don’t
they?

The policy response of the Fisher approach is to repair the
balance sheet. Unfortunately, we cannot
do that without betraying a lot of bedrock American principles. We do not take over banks and forgive the
debt of the American public. We
recognize “moral hazards”, and avoid forgiving rational people for rational
decisions that ended up badly. So, how
do we get out of this mess?

One thing that should not have been done is to adopt the stimulus
program that was executed. It turned out
to be a “make work” program to keep as many people working for as long as it
could. If the President recast it into
acquiring assets that could be leveraged for growth, then we would have been
better off. He talked about improving
the electrical grid, which would have lowered energy prices and help businesses
and consumers operate with lower margins.
He also talked about solar farms and similar things that would have
improved our competitiveness globally.
This did not happen and we are left with the debt and not much
productive improvement to our base that can be used to pay it down. The result is more burdens on all of us. It turned out to be a bad investment. It still does not answer the question of what
we do now.

One thing that should not be done is to increase the taxes
on capital, which would be the impact of the current tax plan advocated by the
Democrats and President Obama. Assets
need to be leveraged for productive use, and taxing capital will reduce this
country’s ability to acquiring productive assets that create jobs. Tax fairness is a legitimate issue, but
cutting off one’s nose despite the face is not the way to go.

The public wants an administration that will increase
employment and lower the unemployment rate.
Government has proven itself incapable of achieving this goal. The business sector is all that is left and
that raises the question of how do we make business work without raising our
risks of capital destruction in a Fisher asset bubble? Not totally sure, but the two approaches we
have in our major political parties are not producing answers to our
problems. What I am looking for is a
pro-growth economic philosophy that includes not just protecting our capital
assets but also leveraging them for growth.
So far, I have not seen anyone on the current stage that talks this
stuff, though Romney comes closest.

My apologies. I led
you, the reader, through a number of economic alternatives that probably raised
the hope of you reading a bunch of easy to remember policy prescriptions only to find out that I don’t have any
-- yet. I only have a bunch of
questions with some clues as to what those prescriptions should be, and the
realization that the current crop of answers is inadequate.

About Me

Who am I? I am a guy who has had a number of jobs in both the private and public sectors, most in finance, planning, and management. My educational background includes studies in public administration, public policy, finance and accounting, computer systems, mathematics, and recently, economics. I grew up as a conservative Republican who loved Nixon up until he broke my heart. I have also liked some Democrats such as John Kennedy and Birch Baye. This is my first attempt ever at trying to be public with my opinion. I would prefer spending my time taking classes, learning new things, enjoying close relationships, and looking forward. But if more of us from the old middle would be more vocal, perhaps our politics will change. My educational background includes a PhD in Public Administration with emphases in public finance and public policy, a Masters of Accounting, and other degrees. My experience includes project management positions with a defense company, a computer company, and a transportation company. I have also taught at several universities and colleges in two states.